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+ G, p. 192 Government budget deficit K G - T, p. 192 Equilibrium in an economy with a government: Y K C + I + G, p. 193 Saving/investment approach to equilibrium in an economy with a government: S + T = I + G, p. 194 Government spending multiplier 1 1 - MPC 1 MPS, p. 196 K K Tax multiplier K - MPC MPS, p. 199 Balance... |
.2. That is, C = 0.8Yd and S = 0.2Yd. a. Is the economy of Nurd in equilibrium? What is Nurd’s equilibrium level of income? What is likely to happen in the coming months if the government takes no action? b. If +200 is the “full-employment” level of Y, what fiscal policy might the government follow if its goal is full ... |
Purchases Planned Aggregate Expenditure Unplanned Inventory Change 2,100 2,600 3,100 3,600 4,100 4,600 5,100 100 100 100 100 100 100 100 300 300 300 300 300 300 300 400 400 400 400 400 400 400 1.7 For each of the following sets of data, determine if output will need to increase, decrease, or remain the same to move th... |
deficit. So if we care about the budget deficit, the best way to stimulate the economy is through increases in spending, not cuts in taxes. Comment. 2.4 Complete the following: a. If the tax multiplier is -1, then the marginal propensity to save is _________ the marginal propensity to consume. b. If the government spe... |
to-GDP ratio, often used to measure the “weight” of public debt on the economy. In 2014, the average debt-to-GDP ratio for OECD countries was 94 percent. Apart from the argument put forward by some economists (refer to Problem 1.4) that excessive public debt levels are detrimental to economic growth, many governments a... |
the chapter, we noted that the government spending multiplier is 1/MPS. (This is the same as the investment multiplier.) We can also derive the multiplier algebraically using our hypothetical consumption function: C = a + b Y - T LEARNING OBJECTIVE Show that the government spending multiplier is one divided by one min... |
∆C = ∆T(MPC ) ∆G - ∆T(MPC ) 1 2 In a balanced-budget increase, ∆G = ∆T; so in the above equation for the net initial increase in spending we can substitute ΔG for ΔT. ∆G - ∆G(MPC) = ∆G(1 - MPC) MyLab Economics Visit www.pearson.com/mylab/economics to complete these exercises online and get instant feedback. Exercises ... |
will be equal to an amount T0 if income (Y) is zero. Second, the tax rate (t) indicates how much net taxes change as income changes. Suppose T0 is equal to –200 and t is 1/3. The resulting tax function is T = -200 + 1 3Y, which is graphed in Figure 9B.1. Note that when income is zero, the government collects “negative... |
I + G Y = 100 + 0.75(Y + 200 - 1 C > 3Y) + 100 + 100 G I y r r This equation may look difficult to solve, but it is not. It simplifies to Y = 100 + 0.75Y + 150 - 25Y + 100 + 100 Y = 450 + 0.5Y 0. 5Y = 450 This means that Y = 450 0.5 = 900, the new equilibrium level of income. Consider the graphic analysis of this equa... |
economics to complete these exercises online and get instant feedback. Exercises that update with real-time data are marked with. M09_CASE3826_13_GE_C09.indd 213 17/04/19 4:16 AM 214 PART III The Core of Macroeconomic Theory ▸▸ FIGURE 9B.2 Different Tax Systems When taxes are strictly lump-sum T = 100 and do not depend... |
is -1.875. (Compare this to -3, which would be the value of the tax multiplier if taxes were a lump sum.) MyLab Economics Visit www.pearson.com/mylab/economics to complete these exercises online and get instant feedback. Exercises that update with real-time data are marked with. M09_CASE3826_13_GE_C09.indd 214 17/04/1... |
models are concerned primarily with real quantities (apples, oranges, hours of labor) and relative prices (the price of apples relative to the price of oranges or the price of labor relative to the prices of other goods). By contrast, as we will now see, money is an important part of the macroeconomy. 10 CHAPTER OUTLI... |
you can buy things with money is so natural and obvious that it seems absurd to mention it, but stop and ask yourself: “How is it that a store owner is willing to part with a steak and a loaf of bread that I can eat in exchange for access to some pieces of paper that are intrinsically worthless?” Why, on the other han... |
money aside from its primary function as a medium of exchange. Money also serves as a store of value—an asset that can be used to transport purchasing power from one time period to another. If you raise chickens and at the end of the month sell them for more than you want to spend and consume immediately, you may keep... |
do red feather rolls and dolphin teeth make good commodity monies, whereas coconut shells would not? 1David Houston, “The Impact of the Red Feather Currency on the Population of the Scarlet Honeyeater on Santa Cruz,” in Sonia Tidemann and Andrew Gosler, eds., Ethno-Ornithology: Birds, Indigenous Peoples, Culture and S... |
beads (among North American Indians), cattle (in southern Africa), and small green scraps of paper (in contemporary North America). The Economics in Practice box on the preceding page describes the use of bird M10_CASE3826_13_GE_C10.indd 218 17/04/19 12:23 AM CHAPTER 10 Money, the Federal Reserve, and the Interest Rat... |
are no longer backed by any commodity— gold, silver, or anything else. They are exchangeable only for dimes, nickels, pennies, other dollars, and so on. The good news here is that the value of this money does not depend on the value of money in another use, as in the case of cigarettes. The harder question is why it h... |
above. The U.S Treasury refers to cryptocurrencies as virtual currency, while the U.S. Internal Revenue Service calls them assets. In terms of the criteria we have listed, while bitcoins are used as a method of exchange and qualify as currency on that dimension, the value volatility of Bitcoin makes its function as a ... |
traveler's checks + other checkable deposits M1 at the end of March 2018 was $3,664.3billion. M1 is a stock measure—it is measured at a point in time. It is the total amount of coins and currency outside of banks and the total dollar amount in checking accounts. M1, or transactions money Money that can be directly use... |
includes the amount of available credit on credit cards (your charge limit minus what you have charged but not paid) as part of the money supply. There are no rules for deciding what is and is not money. However, for our purposes, “money” will always refer to transactions money, or M1. For simplicity, we will say that... |
warehouses where people stored gold for safekeeping. The goldsmiths found, however, that people did not come often to withdraw gold. Why should they, when paper receipts that could easily be converted to gold were “as good as gold”? (In fact, receipts were better than gold—more portable, safer from theft, and so on.) ... |
most mundane of human endeavors. You may suspect the whole process is fundamentally unsound or somehow dubious. After all, the banking system began when someone issued claims for gold that already belonged to someone else. Here you may be on slightly firmer ground. 1Remember, these receipts circulated as money, and pe... |
run, British style! Finally, there is Wyatt Earp, in this case a true story. Earp in 1909, near the end of his colorful life, was hired by a bank in Los Angeles. Rumors were out that the bank had loaned more money than it had gold in its vaults. Depositors, we assume not understanding that this is common, were stormin... |
might begin to have doubts about whether their receipts really were as good as gold. Knowing there were more receipts outstanding than there were ounces of gold in the goldsmith’s vault, they might start to demand gold for receipts. This situation leads to a paradox. It makes perfect sense for people to hold paper rec... |
time, then by definition: Assets - Liabilities K Net Worth or Assets K Liabilities + Net Worth Assets are things a firm owns that are worth something. For a bank, these assets include the bank building, its furniture, its holdings of government securities, cash in its vaults, bonds, stocks, and so on. Most important a... |
to the sum of the items on the right side. The T-account in Figure 10.1 shows a bank having $110 million in assets, of which $20 million are reserves, the deposits the bank has made at the Fed, and its cash on hand (coins and currency). run on a bank Occurs when many of those who have claims on a bank (deposits) prese... |
). The net worth of the bank is what “balances” the balance sheet. Remember that when some item on a bank’s balance sheet changes, there must be at least one other change somewhere else to maintain balance. If a bank’s reserves increase by $1, one of the following must also be true: (1) Its other assets (for example, l... |
the bank has excess reserves of $80. How much can the bank lend and still meet the reserve requirement? For the moment, let us assume that anyone who gets a loan keeps the entire proceeds in the bank or pays them to M10_CASE3826_13_GE_C10.indd 224 17/04/19 12:24 AM CHAPTER 10 Money, the Federal Reserve, and the Intere... |
Figure 10.2 is allowed to make loans of $400 based on the assumption that loans that are made stay in the bank in the form of deposits. Now suppose you borrow from the bank to buy a personal computer and you write a check to the computer store. If the store also deposits its money in the bank, your check merely result... |
Both sides of the T-account balance: the bank’s reserves are 20 percent of its deposits, as required by law, and it is fully loaned up. M10_CASE3826_13_GE_C10.indd 225 17/04/19 12:24 AM 226 PART III The Core of Macroeconomic Theory Bank 1 Bank 2 Bank 3 Panel 1 Panel 2 Panel 3 Assets Liabilities Assets Liabilities Asse... |
With a reserve ratio of 20 percent, Bank 3 can loan out $51.20 (80 percent of $64, leaving 20 percent in required reserves to back the $64 deposit). As the process is repeated over and over, the total amount of deposits created is $500, the sum of the deposits in each of the banks. The banking system can be looked at ... |
It is important to remember that the money multiplier is derived under the assumption that banks hold no excess reserves. For example, when Bank 1 gets the deposit of $100, it loans out the maximum that it can, namely $100 times 1 minus the reserve requirement ratio. If instead Bank 1 held the $100 as excess reserves,... |
government securities. (We discuss the specifics of open market operations later in this chapter.) 10.3 LEARNING OBJECTIVE Describe the functions and structure of the Federal Reserve System. Federal Open Market Committee (FOMC) A group composed of the seven members of the Fed’s Board of Governors, the president of the... |
Open Market Desk New York Federal Reserve Bank about 6,000 commercial banks MyLab Economics Concept Check ▸▴ FIGURE 10.4 The Structure of the Federal Reserve System Functions of the Federal Reserve MyLab Economics Concept Check The Fed is the central bank of the United States. Central banks are sometimes known as “ban... |
100 in reserves. The two banks effectively have traded ownerships of their deposits at the Fed. The total volume of reserves has not changed, nor has the money supply. This way of clearing interbank payments allows banks to shift money around virtually instantaneously. All they need to do is wire the Fed and request a ... |
. In this section we consider how households think about dividing their assets between these two broad categories. What determines how much money people choose to hold? As we have seen, one of the major functions of money is as a means of exchange, to facilitate transactions. We have already discussed the transactions ... |
Check Money, M We thus have a typical economic trade-off here. You gain interest by moving checking account deposits to your savings account, but the more you move, the more often you will have to move some back, which is costly in time. How much should you move? Here is where the interest rate plays a key role. The h... |
transactions. The relationship between money demand and the interest rate will be an important part of our story of monetary policy and the Fed. 10.5 LEARNING OBJECTIVE Define interest and discuss the relationship between interest rates and security prices. Interest Rates and Security Prices Before we discuss how the ... |
To make matters worse, it may have been that the estate was a riskier investment than the securities, and if this were so, a return higher than 5 percent would have been required on the estate purchase to compensate the investor for the extra risk. This would, of course, lower the price of the estate even more. In sho... |
on his or her $1,000 investment is 2 percent. In return for the $1,000 payment the lender receives $20 each year, or 2 percent of the market price of the bond. M10_CASE3826_13_GE_C10.indd 231 17/04/19 12:24 AM 232 PART III The Core of Macroeconomic Theory Suppose that just before the government put its bond on the mar... |
. How does the Fed do this? Its principal tool is to buy U.S. Treasury securities from the banks, which the banks hold. These securities do not count as reserves when held by the banks. If the Fed buys $100 in securities from a bank, it credits the bank with $100 in reserves. The bank’s reserves have gone up by $100, s... |
.6 LEARNING OBJECTIVE Understand how the Fed can change the interest rate. open market operations The purchase and sale by the Fed of government securities in the open market. discount rate The interest rate that banks pay to the Fed to borrow from it. M10_CASE3826_13_GE_C10.indd 232 17/04/19 12:24 AM CHAPTER 10 Money,... |
-called subprime borrowers). Some households bought homes they could not afford based on their incomes, expecting to eventually “cash in” on the rising housing prices. Regulation, by the Fed or other federal or state agencies, was lax, and many financial firms took very large risks. When housing prices began to fall in... |
purchases ended up as an increase in excess reserves of commercial banks, as we will see in the next section. As is not surprising, there has been much political discussion of whether the Fed should have regulated financial institutions more in 2003–2005 and whether its subsequent active role in the system was warrant... |
370 291 4,431 Source: Federal Reserve Statistical Release, Factors affecting Reserve Balances, Board of Governors of the Federal Reserve System. MyLab Economics Real-time data 6The fact that the Fed is not obliged to provide gold for currency means it can never go bankrupt. When the currency was backed by gold, it wou... |
view. Because every financial asset is by definition a liability of some other agent in the economy, whose liability is the dollar bill? The dollar bill is a liability—an IOU—of the Fed. It is, of course, a strange IOU because it can only be redeemed for another IOU of the same type. It is nonetheless classified as a ... |
$1 trillion in excess reserves. Just swapping Treasury securities for reserves does not change the interest rate. For the same reason, changing the reserve requirement ratio would also be useless: the banks are well over the requirement. The tool that the Fed now uses to raise the short-term interest rate is to increa... |
that the Fed has the ability to control the short-term interest rate. Before 2008 it did this primarily through open market operations, and it now does this by changing the rate it pays banks on their reserves with the Fed. S U M M A R Y 10.1 AN OVERVIEW OF MONEY p. 217 1. Money has three distinguishing characteristic... |
funds. The Fed also acts as the bank for the U.S. government. 10.4 THE DEMAND FOR MONEY p. 229 8. The demand for money depends negatively on the interest rate. The higher the interest rate, the higher the opportunity cost (more interest forgone) from holding money and the less money people will want to hold. An increa... |
p. 224 Federal Open Market Committee (FOMC), p. 227 legal tender, p. 219 lender of last resort, p. 229 liquidity property of money, p. 218 M1, or transactions money, p. 220 M2, or broad money, p. 220 medium of exchange, or means of payment, p. 217 Open Market Desk, p. 227 open market operations, p. 232 required reserv... |
in Zimbabwe be willing to accept U.S. dollars in exchange for goods and services? 1.5 In March 2018, the word “cryptocurrency” was added to the Merriam-Webster dictionary, defined as “any MyLab Economics Visit www.pearson.com/mylab/economics to complete these exercises online and get instant feedback. Exercises that u... |
back into circulation through government spending. This is not true when the Fed sells bonds to the public. b. The money multiplier depends on the marginal propen- sity to save. 2.5 You are given this account for a bank: Assets Liabilities Reserves Loans $1,200 6,800 $8,000 Deposits The required reserve ratio is 10 pe... |
$7.3 million only 10 years earlier. Briefly explain how the growth in online banking could affect the timing and severity of a bank run. 10.3 THE FEDERAL RESERVE SYSTEM *2.4 Suppose that as a result of a grave economic crisis, a country’s citizens’ trust in the financial system in general and the central bank in parti... |
sold 50-year bonds at a yield of 2.8 percent, and buyers were given access to 5 billion euros in the form of these bonds. Would you consider this a risky investment? Why? Md 10.6 HOW THE FEDERAL RESERVE CONTROLS THE INTEREST RATE LEARNING OBJECTIVE: Understand how the Fed can change the interest rate. 6.1 In the Repub... |
securities? c. the yield on the securities if the securities were suddenly viewed as being more risky than was previously thought? MyLab Economics Visit www.pearson.com/mylab/economics to complete these exercises online and get instant feedback. Exercises that update with real-time data are marked with. M10_CASE3826_1... |
? QUESTION 2 In this chapter, you learned that the money multiplier is calculated as one divided by the required reserve ratio. This definition implicitly assumes that banks are not holding excess reserves. Would the existence of excess reserves lead the money multiplier to be smaller or larger? CHAPTER 10 APPENDIX LEA... |
will cash in the second security. Assume that the interest rate on the first one-year security is 2 percent. Which would you prefer? Currently, you do not have enough data to answer this question. To consider choice (2) sensibly, you need to know the interest rate on the one-year security that you intend to buy in the... |
a buyer for a two-year security, the seller would be forced to increase the interest rate it offers on the two-year security until it is equal to the average of the current one-year rate and the expected one-year rate for next year. The interest rate on the two-year security will continue to rise until people are once... |
time data are marked with. M10_CASE3826_13_GE_C10.indd 241 17/04/19 12:24 AM 242 PART III The Core of Macroeconomic Theory funds market. The interest rate in this market is called the federal funds rate—the rate banks are charged to borrow reserves from other banks. The federal funds market is really a desk in New York... |
to their risk. Bonds issued by General Motors are in less risk of default than bonds issued by a new risky biotech research firm. Bonds differ from commercial paper in one important way: Bonds have a longer maturity. Bonds are graded in much the same way students are. The highest grade is AAA, the next highest AA, and... |
By the time you finish these two chapters, we hope you will be much better able to understand what lies behind many of the current policy debates in the United States. As we complete the story in this chapter, we will focus on the behavior of two key players in the macroeconomy: firms, who make price and output decisi... |
the same position it was in before the doubling. If wages and prices are both rising, firms get more for their products and pay proportionately more for workers and other inputs. The AS curve in this case would be vertical. Product prices would increase, but firms would not increase output because it would not be prof... |
under different levels of aggregate demand. Aggregate Supply in the Short Run MyLab Economics Concept Check Consider what happens in an economy when there is a shift in the aggregate demand curve coming from, for example, an increase in government spending. How much, if at all, does the price level increase? How much ... |
. With sticky wages, demand increases occur without proportional wage increases and so firms’ marginal cost curves do not shift proportionally. Here increases in prices make output increases more attractive. The empirical evidence suggests that wages do in fact lag prices, that they are slower to change. We discuss in ... |
excess capacity in terms of their plant and equipment and their workforce. With excess capacity, firms may be able to increase output from A to B without a proportionate cost increase. Small price increases may thus be associated with relatively large output responses. We may also observe relatively sticky wages upwar... |
AS curve through effects on the marginal cost of production in many parts of the economy. Figures 11.2(a) and (b) show the effects of shifts in the short-run AS curve coming from changes in wage rates or energy prices. This type of shift is sometimes called a cost shock or supply shock. Oil has historically had quite ... |
+ G We know that there are many possible levels of planned investment, I, each corresponding to a different interest rate. When the interest rate rises, planned investment falls. Therefore, a rise in the interest rate (r) will ‘ceteris paribus’ lead to a fall in total planned spending (C + I + G) as well.1 Figure 11.3... |
� FIGURE 11.4 The IS Curve In the goods market, there is a negative relationship between output and the interest rate because planned investment depends negatively on the interest rate. Any point on the IS curve is an equilibrium in the goods market for the given interest rate shifts IS right IS IS curve Relationship b... |
high. If the announcement is a surprise, it can have large and immediate effects on bond and stock markets. How does the Fed decide on what interest rate value to choose? The Fed’s stated mission is “to foster the stability, integrity and efficiency of the nation’s monetary, financial and payment systems so as to prom... |
, and vice versa if it finds inflation lower than it wishes. The discussion so far has focused on output and inflation as the two main inputs into the Fed’s interest rate decision. But the Fed is not just a mechanical calculator. The Fed chair brings to the FOMC meeting his or her own considerable expertise about the w... |
, and the story is much simpler. Third, the nominal interest rate is used in the (real) goods market in the determination of planned investment. Again, this is an approximation to avoid dynamics, and the insights still hold. The research of one of the authors (Fair) actually supports the use of the nominal rate in the ... |
an informal encounter that he was “boring”, and that “it’s the job of all central bankers to be as boring as possible.”1 Three decades and a global financial crisis later, being boring does not seem to be a requisite to be a good central banker any more. On the contrary, the personality of central bankers is more than... |
sets is high, other things being equal. The intersection of the IS curve and the Fed rule determines the equilibrium values of output and the interest rate. At this point there is equilibrium in the goods market and the value of the interest rate is what the Fed rule calls for. Figure 11.6 shows the equilibrium values... |
between the overall price level (P) and aggregate output (income) (Y). We know from Figure 11.6 that an increase in P shifts the Fed rule to the left (and has no effect on the IS curve). When the Fed rule shifts to the left along an unchanged IS curve, the new equilibrium is at a higher interest rate and a lower level... |
inflation excludes food and energy prices, which are more volatile than other items and may, therefore, mislead policy makers in seeing an inflationary trend where the increase in the price level may have resulted from exogenous shocks with only temporary effects on the economy. Some central banks formally follow an o... |
.6. When Z increases, the Fed rule shifts to the left in Figure 11.6, which results in a higher interest rate and a lower level of output. The lower level of output means that the AD curve shifts to the left when Z increases. It is important to realize that the AD curve is not a market demand curve, and it is not the s... |
of these two curves is the final equilibrium. The equilibrium values of aggregate output (Y) and the price level (P) are determined. Behind the scenes, equilibrium values of the interest rate (r), consumption (C), and planned investment (I) are determined. The variables that are exogenous to the AS/AD model (i.e., not... |
because planned investment depends negatively on the interest rate. It is also the case in practice that consumption depends negatively on the interest rate, so planned investment depending on the interest rate is not the only link between the interest rate and planned aggregate expenditure. We noted briefly in Chapte... |
adjust to prices in the long run, then the long-run AS curve will be vertical. We can see why in Figure 11.9. Initially, the economy is in equilibrium at a price level of P0 and aggregate output of Y0 (the point A at which AD0 and AS0 intersect). Now imagine a shift of the AD curve from AD0 to AD1. In response to this... |
� FIGURE 11.9 The Long-Run Aggregate Supply Curve When the AD curve shifts from AD0 to AD1, the equilibrium price level initially rises from P0 to P1 and output rises from Y0 to Y1. Wages respond in the longer run, shifting the AS curve from AS0 to AS1. If wages fully adjust, output will be back to Y0. Y0 is sometimes ... |
short-run equilibria that occur to the left of Y0? If the short-run AS and AD curves intersect at a level of output below potential output, what will happen? Here again economists disagree. Those who believe the AS curve is vertical in the long run believe that when short-run equilibria exist below Y0, output will ten... |
figure. In the top half of the diagram, aggregate output (income) (Y) and planned aggregate expenditure are initially in equilibrium at AE1, Y1, and price level P1. Now suppose an increase in government spending increases planned aggregate expenditure. If such an increase shifts the AE curve from AE1 to AE2 and the co... |
_CASE3826_13_GE_C11.indd 256 17/04/19 12:26 AM CHAPTER 11 The Determination of Aggregate Output, the Price Level, and the Interest Rate 257 S U M M A R Y 11.1 THE AGGREGATE SUPPLY (AS) CURVE p. 244 1. Aggregate supply is the total supply of goods and services in an economy. The aggregate supply (AS) curve shows the rel... |
p. 254 8. Consumption as well as planned investment depends on the interest rate. This is another reason for a downward-sloping AD curve. Another reason is that consumption also depends on real wealth. 5. Fed behavior is described by an interest rate rule, the Fed rule. The Fed’s choice of the interest rate value depe... |
_C11.indd 257 17/04/19 12:26 AM 258 PART III The Core of Macroeconomic Theory action will have on the economy? Be specific in your answer. What was the hoped-for result on C, I, and Y? 2.2 Some economists argue that the “animal spirits” of inves- tors are so important in determining the level of investment in the econo... |
p. 250] In a June 13, 2018 press conference, Fed Chair Jerome Powell announced a 0.25 point increase in the federal funds rate target, to between 1.75 percent and 2.00 percent, the seventh rate hike since late 2015. Powell also indicated that two additional rate hikes were likely before the end of the year. What has h... |
Prince Barney of Mayberry has decided that he wants the economy to grow and has ordered the Royal Central Bank of Mayberry to print more currency so banks can expand their loans to stimulate growth. Explain what will most likely happen to the economy of Mayberry as a result of Prince Barney’s actions and show the resu... |
no input price or output price changes but that at levels of output above full capacity, firms have no choice but to raise prices if demand increases. In reality, however, the short-run AS curve isn’t flat and then vertical. Rather, it becomes steeper as we move from left to right on the diagram. Explain why. What cir... |
process about taxes and spending have important macroeconomic consequences. The AS/AD model developed in the last chapter is a key tool in allowing us to explore these consequences. M12_CASE3826_13_GE_C12.indd 260 17/04/19 12:27 AM CHAPTER 12 Policy Effects and Cost Shocks in the AS/AD Model 261 12.1 LEARNING OBJECTIV... |
an increase in demand by increasing output much more than they increase prices. Figure 12.2 shows what happens when stimulus occurs when the economy is operating on the steep part of the AS curve (point B), at a high level relative to its resources. In this case, an expansionary fiscal policy results in a small change... |
(because after tax income has increased). Firms again mostly raise their prices, so P increases, and so the Fed raises the interest rate, which lowers planned investment. If total output is little changed, the interest rate must rise such that the decrease in planned investment is roughly equal to the increase in cons... |
. Another source of disagreement among macroeconomists centers on whether equilibria below potential output, Y in Figure 11.8 in Chapter 11, are self-correcting (that is, without government intervention). If equilibria below potential output are self-correcting, the economy will M12_CASE3826_13_GE_C12.indd 262 17/04/19... |
moving the economy as it follows its rule? There are several features of the AS/AD model that we need to consider regarding the effectiveness of the Fed, which we turn to now. The Fed’s Response to the Z Factors MyLab Economics Concept Check We noted in Chapter 11 that the Fed is not just a calculator, responding in a... |
it responds with a large increase in the interest rate, thus driving down planned 1Remember that the Fed actually cares about inflation, the change in P, rather than the level of P itself. We are using P as an approximation. Also, the Fed cares about output because of its effect on employment. M12_CASE3826_13_GE_C12.i... |
Z are far below what they would have to be to induce the Fed to move to a positive interest rate in the Fed rule. We will call this case a binding situation. What does Figure 11.6 in Chapter 11 look like in a binding situation? This is shown in Figure 12.4. In this situation the interest rate is always zero, and so eq... |
investment when G increases or T decreases because the interest rate does not increase, the shift is even greater. With a vertical AD curve, fiscal policy can be used to increase output, but monetary policy cannot. You might ask, what if the economy is on the nearly vertical part of the AS curve and a vertical AD curv... |
of both high inflation and high unemployment. M12_CASE3826_13_GE_C12.indd 265 17/04/19 12:27 AM 266 PART III The Core of Macroeconomic Theory ◂▸ FIGURE 12.6 An Adverse Cost Shock AS1 AS0 P1 P0 MyLab Economics Concept Check Y1 Y0 Aggregate output (income) (Y) AD reason output falls is that the increase in P leads the F... |
10 billion (€0.7 billion). The combined effects of the decline in agricultural exports and the increase in wheat imports are estimated to reduce the trade balance by R20 billion (€1.4 billion). Since the Western Cape accounts for 13.3 percent of overall GDP, growth in 2018 could potentially drop to 0.8 percent from its... |
shifts, exogenous to the model, that are interesting to consider. These we can put under the general heading of demand-side shocks. As mentioned in Chapter 5, in the 1930s when macroeconomics was just beginning, John Maynard Keynes introduced the idea of “animal spirits” of investors. Keynes’ animal spirits were his w... |
it expects its competitors’ prices to be. Suppose inflation has been running at about 10 percent per year. Our firm probably expects its competitors will raise their prices about 10 percent this year, so it is likely to raise the price of its own toaster by about 10 percent. This response is how expectations can get “... |
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